“Financial independence is not reached by doing a few big things at a late stage of your life but rather from doing little things on a continuous basis from an early age.”
The SA Savings Institute (SASI) recommends that you save your Christmas bonus – if you are lucky enough to receive one. Prem Govender, SASI chairperson, says, “While it is justifiable to make merry, we want to remind consumers that the short-lived joy over the season might not be worth the suffering they are likely to go through if they do not plan for obligations awaiting in the new year.”
So what’s a wise way of allocating your bonus? Dulcie Weyks, Principal Executive at PSG Konsult Corporate suggests some practical ways of getting the most bang for your bonus.
So it’s not really a question of ‘to spend or not to spend’ but rather a case of where would it be best to consolidate your debts, invest or save and make sure you start the new year on a more financially sound footing.”She says, “According to SASI, South Africans are barely saving and most households are in deep debt as a result of increased strain on cash flow during the second quarter of the year. The National Credit Regulator claimed it was owed R1.36 trillion in the form of mortgages, vehicle finance, credit and clothing cards, personal loans, pension and insurance and pension-backed loans!
Your rainy day fund
Every budget should have a ‘rainy day’ fund for unexpected expenses like a hot water cylinder bursting, car problems or unexpected medical expenses. This would be a perfect place for your bonus or part of your bonus to go as you never know when you might need some extra cash. PSGK Corporate recommend putting at least 50% of your bonus into a savings account. Remember the ideal position to be in is to have 3 to 6 month’s salary stashed away in case of emergencies.
Kick start an investment
Do you still remember what you spent your 2002 Christmas bonus on? Let’s assume you received a bonus of R10 000 ten years ago which you invested in the Coronation Balanced Plus fund. Nominal returns were 16,85 % per annum over 10 years which means you would have a nifty R44 000 now!
Let’s assume that we receive a return of inflation plus 6 % and we left the investment for a further ten years. It would grow to R137 000
And a further ten years? Your tiny R10 000 investment would now have a value of R425 000.
Whether you are saving for your children’s education, retirement or the holiday of a lifetime in ten years, putting your bonus into an investment is forward thinking and a great step toward a more secure financial future.
A good investment option to consider is Unit Trusts for the following reasons:
· Low cost way to invest in markets which you otherwise would find difficult to access;
· Investment returns compare very favourably with returns from more traditional investment products (eg endowments)
· Offers diversification between all the asset classes (eg equity, property, cash and bonds)
· Complete transparency in that prices are published in the newspaper daily and performance figures are readily available
· Advantage of accessibility and liquidity in that you can cash in all or part of your investment at any time
· Investments can be made at any given time which is perfect for investing your bonus.
Consult an independent financial advisor when deciding which unit trusts to invest in to ensure you choose funds that suits your investment horizon (short, medium or long term) and ask for options that offer a competitive cost structure.
Clearing your debts
Have a look at what your most expensive debt is (eg. where you are paying the highest interest?) and pay a portion of your bonus to reduce to clear this. It will save interest, shorten the outstanding debt period and free cash up sooner which is being used on debt repayments which you can then channel towards saving.
The cumulative effect of a number of debts is going to prevent you enjoying financial freedom.
Safe under the mattress?
Although there are a few people who still believe under the mattress is the safest place for their money, remember it will never beat inflation. Get advice on where you can get the best interest rates and to find out how quickly the money is accessible.
School fees upfront
It might be a good idea to pay your school fees in advance, while you have the money. You will normally receive a discount and could end up paying for only ten of the twelve months. So check what discount you can get and consider clearing the school fees deck for the year.
Pay annual insurance fee or hospital plan
Not only will this free up cash for you but will reduce the amount you owe insurers.
Pay all outstanding service fees such as electricity and water
Go into the new year with a clean slate when it comes to utility bills.
Chillax or treat yourself
You have worked hard for your bonus and it is a well-deserved break over the festive season. Rather than fill your bags at the shopping mall invest in your well being by going on a holiday. Holiday memories last forever, must-have gadgets usually just until the warranty expires! If you are happier at home, treat yourself to something you wouldn’t normally be able to afford – spoil yourself. But make sure the amount you set aside for something frivolous is not more than about 10% of the total amount.
You’ve done all these and still have spare cash?
If you’re lucky enough to be in this position there are many deserving charities that would love your support over this period. Even if you haven’t ticked all the boxes for spending your bonus wisely it is still worthwhile spreading some cheer. Not only are supporting those who need it but you benefit from the joy of giving.